No escape from the demographic tide in Japan

23 Mar 2011 by Jim Fickett.

Even a cursory look at the long-term trends in working age population and retirement age population show that the Japanese government will find, at best, temporary reprieves from its shrinking domestic funding base.

It seems likely that Japan will provide the first example of a major economy defaulting on its obligations, either through explicit refusal to pay or, more likely, by way of high inflation.

There will be ups and downs along the way. The main point I want to make in this post is that the overall decline in household savings, formerly a primary funding source for the government deficit, is clear and unstoppable, despite any temporary signs to the contrary.

As many have pointed out, the key issue is demographics. Simplifying from the complex diagrams often seen, depicting the detailed age structure of the population, there are really only two variables needed to see the problem trend: the working age population and the retirement age population. In Japan, the working age population has peaked and is declining, while the retirement age population is rapidly growing:

Neither of these trends is likely to change. That means there will be fewer people saving and more people dis-saving for the foreseeable future. Even if there are times when the population saves more temporarily, as happened following the financial crisis, the trend will continue to be down:

(For data sources see the new Reference page Japan demographics. Click for larger image.)

It is not too early to think about a personal investment strategy. I will be setting up some key indicators to watch, and considering particular assets, in future posts.